Chinese e-commerce giant Alibaba (BABA) recently released the beta version of its AI model, which it calls Happy Horse. The company's overall AI business in general and Happy Horse in particular appear to be promising, while the firm's cloud unit has performed well in recent quarters.

But BABA reported weak financial results for its quarter that ended in December. And with the Chinese economy starting to struggle due to the U.S.-Iran war, the performance of BABA's core domestic e-commerce business looks poised to deteriorate until the crisis in the Mideast is resolved.

Given the threats and uncertainty facing BABA's e-commerce business, which was already struggling at the end of last year, investors should sell BABA stock.

About Alibaba Stock

In addition to e-commerce and its cloud business which includes AI ventures, Alibaba has entertainment, logistics, and digital media ventures.

The shares have a forward price-earnings ratio of 20.6 times and a market capitalization of $313 billion.

A Promising AI Business and a Surging Cloud Unit

Happy Horse appears to have significant potential, as it achieved the highest rating “for both text-to-video and image-to-video generation” among AI models earlier this month. And Happy Horse is expected to appeal to many AI developers and businesses that are looking to utilize the technology. In light of these points, the model could significantly boost BABA's top and bottom lines over the longer term.

Meanwhile, the tech giant is reportedly holding talks about investing in China-based AI-model maker DeepSeek. DeepSeek early in 2025 made waves by releasing a top-notch AI model that cost very little. By combining its own technology with that of DeepSeek, Alibaba could become one of the world's leading developers of AI models. And, the tech giant can effectively and easily market its AI technology to the many businesses that use its e-commerce websites.

Also encouragingly, in BABA's quarter that ended in December, the revenue of its Cloud Intelligence Unit jumped 36% versus the same period a year earlier to $6.19 billion, while the division's adjusted EBITDA jumped 24.6% year-over-year (YOY) to 3.9 billion Chinese yuan. The firm indicated that “the increasing adoption of (its) AI-related products” was key to the unit's momentum, as “AI-related product revenue” at least doubled YOY.

E-Commerce Weakness Has Plagued BABA, and the Situation Is Likely to Deteriorate

For the second consecutive quarter, the firm's overall revenue increased just 2% YOY during the December quarter. E-commerce was a major contributor to the weak top line increase. The firm's Customer Management Revenue, described as “the key measure of advertiser and merchant monetization on” its two main China-based e-commerce websites, increased just 1% YOY.

And with the U.S.-Iran war beginning to hurt China's economy, the situation is likely to get worse for BABA's e-commerce business this quarter.

The Bottom Line on BABA Stock

AI is clearly boosting the company's revenue and cash generation to a limited extent, and over the longer term, it should become a huge needle mover for BABA stock. But in the December quarter, the Cloud Intelligence unit only generated  $6.19 billion of the firm's total revenue of $40.7 billion. So domestic e-commerce, whose revenue came in at $22.8 billion, has much more impact on the company's overall results than the cloud unit. And with the China e-commerce business stagnating last quarter and likely deteriorating this quarter, now is not a good time to own BABA stock.

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